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At this point, a firm must often choose how to access financial capital. It may choose to borrow from a bank, issue bonds, or issue stock. The great disadvantage of borrowing money from a bank or issuing bonds is that the firm commits to scheduled interest payments, whether or not it has sufficient income. The great advantage of borrowing money is that the firm maintains control of its operations and is not subject to shareholders. Issuing stock involves selling off ownership of the company to the public and becoming responsible to a board of directors and the shareholders.

The benefit of issuing stock is that a small and growing firm increases its visibility in the financial markets and can access large amounts of financial capital for expansion, without worrying about paying this money back. If the firm is successful and profitable, the board of directors will need to decide upon a dividend payout or how to reinvest profits to further grow the company. Issuing and placing stock is expensive, requires the expertise of investment bankers and attorneys, and entails compliance with reporting requirements to shareholders and government agencies, such as the federal Securities and Exchange Commission.

Key concepts and summary

Companies can raise early-stage financial capital in several ways: from their owners’ or managers’ personal savings, or credit cards and from private investors like angel investors and venture capital firms.

A bond is a financial contract through which a borrower agrees to repay the amount that was borrowed. A bond specifies an amount that will be borrowed, the amounts that will be repaid over time based on the interest rate when the bond is issued, and the time until repayment. Corporate bonds are issued by firms; municipal bonds are issued by cities, state bonds by U.S. states, and Treasury bonds by the federal government through the U.S. Department of the Treasury.

Stock represents ownership of a firm. The stock of a company is divided into shares. A firm receives financial capital when it sells stock to the public. A company’s first sale of stock to the public is called the initial public offering (IPO). However, a firm does not receive any funds when one shareholder sells stock in the firm to another investor. The rate of return on stock is received in two forms: dividends and capital gains.

A private company is usually owned by the people who run it on a day-to-day basis, although it can be run by hired managers. A private company owned and run by an individual is called a sole proprietorship, while a firm owned run by a group is called a partnership. When a firm decides to sell stock that can be bought and sold by financial investors, then the firm is owned by its shareholders—who in turn elect a board of directors to hire top day-to-day management—and is called a public company. Corporate governance is the name economists give to the institutions that are supposed to watch over top executives, though it does not always work.

Problems

The Darkroom Windowshade Company has 100,000 shares of stock outstanding. The investors in the firm own the following numbers of shares: investor 1 has 20,000 shares; investor 2 has 18,000 shares; investor 3 has 15,000 shares; investor 4 has 10,000 shares; investor 5 has 7,000 shares; and investors 6 through 11 have 5,000 shares each. What is the minimum number of investors it would take to vote to change the top management of the company? If investors 1 and 2 agree to vote together, can they be certain of always getting their way in how the company will be run?

Got questions? Get instant answers now!

References

National Venture Capital Association. “Recent Stats&Studies.” http://www.nvca.org/index.php?option=com_content&view=article&id=344&Itemid=103Update.

Freddie Mac. 2015. “Freddie Mac Update: March 2015.” Accessed April 13, 2015. http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf.

Former, Jamie D. “Should Your Small Business Go Public? Consider the Benefits and Risks of Becoming a Publicly Traded Company.” U.S. Small Business Administration: Community Blog (blog) . Publication date March 23, 2010. http://www.sba.gov/community/blogs/community-blogs/business-law-advisor/should-your-small-business-go-public-consider-0.

Questions & Answers

how do we calculate the firm's profit maximizing output in the short run given marginal cost ,average cost and average variable costs?
Nomuhle Reply
what is employment?
Ahmarh Reply
what is meant by broadening the tax base?
Fiona Reply
What is scarcity.
Npoanlarb Reply
when there is adequate resources
Fiona
the represent inadequacy of resources relative to the needs of individuals
Moses
scarcity is the unavailability of resources to attain unlimited wants and needs of people
Nzubechukwu
for exam land and money
Ruchi
hi negi
Gul
why our wants are limited
Npoanlarb Reply
nooo want is unlimited but resources are limited
Ruchi
and do to that there occurs scarcity and we have to make choice in order to have what we need if need be I will explain more
Madara
our wants are not limited but rather the resources
Moses
as we know that there are two principle of microeconomics scarcity of resources and they have alternative uses...
Ruchi
yes .....
Mathias
because our resources are limited./we have a limited resources.
Ijeoma
our wants are not limited. because always the desire for something always arises. our means are rather limited and our wants are unlimited
Anthony
what is demand
Thank Reply
demand is something wt we called in economic theory of demand it simply means if price of product is increase then demand of product will decrease
Ruchi
inverse relationship between demand and price
Ruchi
in microeconomic
Ruchi
demand is what and how much you want and what's your need...
Shikhar
how can one be so with economics even while you have less knowledge in mathematics.
OKORO Reply
why is it that some products increases everyday by day
Chiamaka Reply
because demand is increase
Ruchi
because demand is increase
Patience
but how demand increases?
Aziz
Because of the Marketing and purchasing power of people.
AmarbirSingh
but how could we know that people's demands have increased everyday by day and how could we know that this is time to produced the products in the market. Is any connection among them
yaqoob
for normal good people demand remain the same if price of product will increase or not
Ruchi
see that some product which increases day by day is comes under normal good which is used by consumer
Ruchi
Seems hot discussing going here
Shamamet
If there are less products demand starts to increase for those products
Shamamet
Economics is really interesting to learn ....
Shamamet
see there is Inferior goods ands normal goods inferior good demand is rarely increase whereas as we talk about normal good demand will absolutely Increase whether price is increase or not
Ruchi
and demand for normal goods increase cause people's income as a while increases time to time
Abhisek
and it might also be that the cost of raw materials are high.
ATTAH
may be
Ruchi
obviously because demand is increasing.....and price is getting low.....
Shikhar
hmmm there is inverse relationship between demand and price
Ruchi
This is because the supply of those products in relation to raw materials are decreasing and they are also necessities. This crate shortage in the market, so sellers will rise the prices of those products.
Abdul
increase in price of product is as a result of increase in supply... according to law of supply
Nzubechukwu
Importance of economics
Odunayomi Reply
the nature and significance of economics studies
Deborah
What is demand
Shuaib Reply
deman is amount of goods and services a consumer is willing and able to buy or purchase at a given price.
Sainabou
the willingness and ability of a body to purchase goods nd servicesbis called demand ,so if she/has ability but doesn't have willingness it's not a demand same if she or he has willingness but doesn't has ability it's not a demand too
Gul
Demand refers to as quantities of a goods and services in which consumers are willing and able to purchase at a given period of time and demand can also be defined as the desire or willingness and backed by the ability to pay.
Fadiga
Yeah
Mathias
What is Choice
Kofi
Choice refers to the ability of a consumer or producer to decide which good, service or resource to purchase or provide from a range of possible options. Being free to chose is regarded as a fundamental indicator of economic well being and development.
Shonal
choice is a act of selecting or choosing from the numerous or plenty wants.
Fadiga
demand is want and it is also what you need and able to afford a particular period of time... because demand changes with time.
Ijeoma
Demand refers to the ability of the consumer to pay for a particular product at a given price
Abdul
this is the desire or willingness to purchase goods and services backed up with the ability to pày
Nzubechukwu
how does consumer make profit
Clifford Reply
by buying goods in bulk.
Ijeoma
Compare and contract the function of commercial bank and the central bank of Nigeria
Akwi Reply
what do think is the difference between overhead costs and prime cost
Abdoulkarim
what is economics
Mohamed Reply
economics is a social science that study's how resources can be used to produce goods and services for society
Nathan
Economic is a science which studies human behavior as a relationship between ends and scares means which have alternatives uses or purposes.
Fadiga
what is economics
Mohamed Reply
what is the basic economic problem
John Reply
rules
Buayadarat_Gaming
unlimited wants vs limited resources
Nathan

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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